Iran Nuclear Deal Realities: A Response to AIPAC

AIPAC recently issued a memorandum to congressional members and staff with respect to the future of the Iran sanctions regime should Congress reject the Joint Comprehensive Plan of Action (JCPOA). This memorandum notes that, if a joint resolution of disapproval for the JCPOA were to be passed by both houses of Congress and President Obama’s inevitable veto overridden by a two-thirds vote again of both houses, the U.S. sanctions regime would remain legally in place. It is on this basis that AIPAC argues there will be no deterioration of the international sanctions regime facing Iran, at least until it completes the nuclear steps it committed to take in the JCPOA. Consequently, AIPAC considers there will be ample time to renegotiate the text of the JCPOA before Iran has finished its work.

AIPAC is certainly correct that U.S. sanctions can be maintained as a matter of law should Congress reject the JCPOA. But, it is there that AIPAC’s analysis parts company with several important realities.

Maintaining the sanctions regime if the JCPOA falls apart is about more than the letter of U.S. law.

AIPAC’s main argument appears to be that since U.S. law will not change if the JCPOA is rejected, we have nothing to fear from a post-JCPOA-rejection world. This assertion ignores the fundamental reality that the U.S. sanctions with teeth require foreign participation in order to work. This is because U.S. law is structured to present an “us or them” choice to international businesses and banks therefore have to elect to follow the U.S. lead (and U.S. law) in order to prevent transactions from taking place with Iran.

Certainly, as AIPAC has noted, there is fear of the consequences of U.S. sanctions on foreign businesses to motivate them. No one likes paying multi-billion dollar fines and many of the most important international corporations and financial institutions will shy away from doing business with Iran until the status of U.S. sanctions is resolved. But, cooperation with U.S. sanctions has also been about a common aim and pursuit by the governments of those corporations and banks. European, East Asian, and Indian firms have declined to do business in Iran – even if their exposure to U.S. sanctions was limited – because there was a common understanding that sanctions were needed to prevent Iran’s acquisition of nuclear weapons. This common sense of purpose will be lost if the United States walks away from the JCPOA. Instead, the only motivating force will be the threat of U.S. penalties. But, for those without U.S. exposure – or prepared to risk it – this may not be enough to stop business with Iran.

Moreover, foreign governments can take steps to preclude corporate cooperation with U.S. sanctions. AIPAC takes it as a given that if the U.S. Congress passes new sanctions, foreign cooperation is assured. But, let us remember a time in which there was a significant difference between the United States and Europe on Iran sanctions: 1996’s Iran-Libya Sanctions Act, which prompted – among other things – passage of European legislation that explicitly forbade companies from complying with U.S. law, deemed by the EU to be extraterritorial. This law is still on the books, as is a European policy decision in 1997 to bring the United States to the World Trade Organization should it impose sanctions on a European company pursuant to ILSA. Fortuitously, this situation has been avoided to date because of cooperation between the United States and EU. But, should that cooperation lapse, this challenge could once again be met with infighting between the EU and United States, hardly a propitious scenario for building a unified diplomatic front to get a better nuclear deal.

Even with cooperation, there won’t be support for new sanctions.

Let us assume for a moment that rejection of JCPOA and resumption of U.S. sanctions does not lead to immediate legal conflict between the United States and its sanctioning partners. This is still a far cry from an environment conducive to the imposition of new sanctions to strengthen the U.S. negotiating hand with Iran.

No one in the opposition camp has laid out a clear strategy for how to secure such pressure, other than to threaten the imposition of sanctions against our partners directly. This is understandable, because there is no credible strategy for doing so. The United States has secured cooperation with its sanctions efforts before on the basis of a plan to get a negotiated settlement of the nuclear issue. But, that plan would be largely out of the window as a result of the rejection of the JCPOA.

Skeptics doubtless would bristle at this idea, stridently noting that they only wish to “improve” the deal, not destroy it. But, considering that AIPAC argued that the JCPOA could only be a good deal if it required “Iran to dismantle its nuclear infrastructure and relinquish its uranium stockpile,”[1] it is unlikely that this is the kind of condition Iran could plausibly accept. Other skeptics have also argued that the provision of sanctions relief is itself a problem because of the potential for destabilizing activities and terrorism being funded by Iran. Taken together, the “improved” nuclear deal would require a wholesale rewrite, with terms involving the termination of Iran’s nuclear program and absence of sanctions relief until it has fully resolved any outstanding concerns with its regional foreign policy.

Such a deal would, of course, be to the U.S. advantage. But, it is also thoroughly implausible and it is doubtful that U.S. partners (aside from Israel) would sign on to such a construct because it has no hope of being accepted by Iran. It is worth noting, for example, that Russia and China have long maintained that Iran has a right under the NPT to an enrichment program and that during negotiations, Russia indicated that it would accept no language – even if Iran was amenable – that appeared to abridge this NPT right. And, it is also worth noting that – though some have tried to suggest that it is merely Administration spin – the Ambassadors of the European-3 countries (France, Germany and the UK) have all apparently made it quite clear to interested Congressional interlocutors that they see no chance of resuming talks if Congress torpedoes the JCPOA.[2]

Radical, dramatic escalation of sanctions pressure would be necessary

It is unfortunate that the international community would probably not join willingly in an escalation of sanctions pressure against Iran because, if there is any hope of using sanctions to force Iranian nuclear capitulation, then it would have to come on the back of a such a massive escalation.

To be clear, I do not believe that more sanctions would force Iran to jettison its nuclear program. Sensible, respected skeptics of the nuclear deal have agreed with this general conclusion (such as Juan Zarate during testimony before the Senate Foreign Relations Committee on July 30[3]). Moreover, the history of the Iranian nuclear experience is that when faced with new sanctions, Iran responds with its own escalation by installing thousands of new centrifuges.

But, assuming that sanctions could create such a scenario, then it certainly would not be with the tools in place to date. Iran’s economy has rebounded from its recession in 2012-2013 that sanctions helped to create. Iran’s economy is still weak and it requires comprehensive sanctions relief to truly recover. But, this also suggests that keeping the sanctions at status quo levels would also not be enough to tip Iran back into crisis and certainly sufficient crisis so as to get Iran to go even farther past the redlines established for the negotiation by the Supreme Leader.

But, without international support, this would not be achievable. The best that could be hoped for is spotty cooperation and compliance, and the use of penalties to punish those who transgress U.S. sanctions. But, let us not forget that the imposition of sanctions penalties is itself an admission of failure: failure of the deterrence and prevention strategy that sanctions are actually meant to effectuate. For penalties to be imposed, it means that the bad guys have gotten the materials, technology or money that was to be denied by sanctions. Penalties being imposed are not victories – they are compensation for the victims.

Penalties also hurt the United States, both in short-term and long-term ways. First and foremost, the imposition of sanctions against particular targets means that they cannot do business in the United States. This does not matter when Iranian individuals and entities are involved. But, it does when major international banks or corporations are. Denying access to these institutions also means that U.S. persons cannot do business with them, harming U.S. economic competitiveness. The argument that our economy is so large that it can sustain such damage only works if sanctions are imposed in a small-scale fashion. But, if the United States were to threaten the imposition of sanctions on major foreign financial institutions – and go beyond penalties to the punishment of cutting off correspondent banking relationships, as several statutes require – we could find our own economic position suffering. Imagine, for example, a decision to impose such sanctions on major Chinese banks should China refuse to make significant reductions in its purchases of Iranian oil once the sanctions mandating reductions come back into place. It is not just the Chinese businesses that would suffer but anyone who does business in China. China is the U.S. second largest trading partner. Combined with India, Japan and Korea (the top four importers of Iranian oil), and those we would have to threaten with sanctions account for a quarter of all U.S. international trade (according to June 2015 year-to-date data from the Census Bureau).[4]

Long-term, another demonstration of the risk of reliance on the U.S.-led international financial system would further incentivize moves away from it. I have written about this extensively and the risk both to the U.S. economy and to the ability of the United States to use sanctions as a foreign policy tool.[5] I’m not alone: JCPOA skeptics Mark Dubowitz and Jonathan Schanzer similarly warned of the risk of alternative financial systems emerging and the threat this would pose to the United States from both financial and national security perspectives.[6] It is this threat that Secretary Kerry was referencing in a recent interview when he said that the use of the U.S. dollar as a reserve currency was at risk if the Iran deal were to be jettisoned.

And Iran is hardly likely to sit around waiting for more pressure

Even more fundamentally, AIPAC misses the boat when it suggests that Iran’s response to U.S. rejection of the JCPOA will be placid understanding and even continuation of its steps under the JCPOA (!) rather than an escalation of its nuclear program. To be sure, Iran would seek to take advantage of the situation by holding steady with its nuclear activities provided the JPOA’s sanctions relief would remain in place; this would further its ability to sow dissention in the international community and poison the U.S. ability to get partners for maintaining, much less escalating, sanctions.

But, the Iran Nuclear Agreement Review Act (INARA) would ensure that is impossible. The terms of that Act require the President to stop providing sanctions relief under the JPOA in addition to not moving forward with relief under the JCPOA. This means that oil sanctions would once again be fully in-force, with significant reductions mandated every 180 days. International oil prices suggest that such reductions would be possible without creating a market crisis, but it strains credulity to believe that China and India would undertake 20% reductions of their imports of Iranian crude oil in the aftermath of a U.S.-aborted nuclear deal. And then, a real U.S. choice would be needed whether to impose sanctions on associated banks and oil companies – which would ironically free them to engage in however much oil they might wish to purchase from Iran, knowing that they face no further penalty – or to pass on such sanctions at the risk of hollowing out the sanctions regime.

In response to concerns that the resumption of this sanctions campaign would also prompt Iran to start installing thousands of centrifuges, enriching tons of uranium, and completing the Arak reactor (capable of producing 1-2 weapons worth of weapons-grade plutonium per year), some outside observers have suggested either that the President could use his “prosecutorial discretion” to not enforce the law vigorously or that he could rewrite U.S. law unilaterally with Executive Orders to keep providing sanctions relief. No one in the Administration has made such a claim and it is doubtful they would, as this could prompt legal challenge and constitutional crisis…from which Iran would surely benefit. Moreover, it is questionable logic to assert that a better deal is achievable while also arguing that, in order to keep the nuclear situation from escalating, the United States ought to hold back on sanctions enforcement.

Boiling things down

AIPAC is probably right that the international sanctions regime will not collapse on Day 1 if the JCPOA dies in the halls of the U.S. Congress. Iran will have to evaluate what it chooses to do in response, as will U.S. partners. But, at best, the sanctions regime will be mauled, having lost its credibility in the international community and place as part of a diplomatic endeavor. The proposed alternative deals suggest either that the Iranians are just waiting to accept worse terms after the U.S. fumbles the ball or that far more pressure would be needed than the international market would likely bear. Having lost its international credibility, the United States will be in no place to secure such international pressure on a voluntary basis and will face some important, unenviable real world problems as a result. Iran will reap the rewards of U.S. diplomatic failure, either waiting out the sanctions campaign in its death throes or expanding its nuclear program to ensure that any future negotiation starts with a better Iranian bottom-line. Either way, the United States (and its partners at greatest risk of an Iranian nuclear weapon) would be worse off.

Richard Nephew is the Program Director, Economic Statecraft, Sanctions and Energy Markets, for the Center on Global Energy Policy. Nephew joined the Center February 1, 2015 directly from his role as Principal Deputy Coordinator for Sanctions Policy at the Department of State, a position he held since February 2013. Nephew also served as the lead sanctions expert for the U.S. team negotiating with Iran. From May 2011 to January 2013 Nephew served as the Director for Iran on the National Security Staff where he was responsible for managing a period of intense expansion of U.S. sanctions on Iran. Earlier in his career he served in the Bureau of International Security and Nonproliferation at the State Department and in the Office of Nonproliferation and International Security at the Department of Energy. Nephew holds a Masters in Security Policy Studies and a Bachelors in International Affairs, both from The George Washington University.